INDUSTRY SIZE: THE ADDRESSABLE MARKET OPPORTUNITY
We estimate that interactive entertainment sales totaled $44 billion worldwide in 2008, consisting of $26.4 billion in software sales and $17.7 billion in hardware sales. The nearly $4 billion Japanese software market remains challenging for non-Japanese publishers, primarily due to cultural differences, and we expect the U.S. and European publishers to continue focusing primarily on the U.S. and European markets for the foreseeable future. We estimate that the addressable market opportunity for U.S. and European packaged software publishers in 2009 is $23.5 billion, growing to over $29 billion by 2011. In addition, we estimate that the addressable market for subscription online games and game-related downloads is well over $3 billion, with U.S. and European publishers competing for as much as 70% share. We expect the subscription market to grow more rapidly than the packaged goods market, as “new” models (such as Xbox Live subscriptions, PlayStation Network, OnLive and WildTangent) are established in non-traditional gaming channels, with the market opportunity likely exceeding $5 billion by the end of the decade. Console, handheld and PC video games comprise a significant portion of overall entertainment industry sales, comparing favorably with other mainstream entertainment products such as movies, books, and music. With comparable size and growth at a faster rate than these competing forms of entertainment, we expect the interactive entertainment software sector to continue to present a compelling investment opportunity over the next five to 10 years.
ONLIVE COULD CHANGE THE LANDSCAPE
In mid-March, 2009, we were given a private demo of OnLive. We were blown away. The OnLive service consists of a server-based gaming platform and a simple device that compresses and decompresses the game file to allow a low latency transmission of the game from server to user’s television or PC. Game files reside on central servers, and users access the game by logging into their OnLive accounts and playing either single-player or multi-player games. We demoed both, and the results were utterly impressive.
The secret to OnLive is its compression technology. Provided that the user has high speed Internet access, signals between OnLive servers and the user interface make the round trip journey in 80 milliseconds or less (less than 1/10 of a second). The games we demoed ran at around 25 milliseconds, according to the company. At this transmission rate, most games feel as if there is no lag whatsoever, and the game we played (Crysis) felt as if we were playing on a fully-optimized gaming PC.
It is not clear to us that OnLive will dominate any time soon, but we are confident that this breakthrough technology will ultimately be widely adopted. In our view, the “killer app” for the technology is videoconferencing, which will likely attract widespread demand and which can be bundled with Internet or telephone service at a meaningful up charge. With close to zero latency, we envision tremendous demand for OnLive as a videoconferencing service, and think that broadband Internet providers like Verizon or AT&T would find the service appealing as a way to increase penetration and revenues.
Regardless of the ultimate killer app, it is clear to us that there is a future for server-based gaming. OnLive should appeal to those households that have not yet purchased a current generation console, and if the company is able to get pricing right for its business model, it is likely that it will penetrate some portion of the tens of millions of households that have not yet adopted current technology. The trade-off between buying a new console and subscribing to the OnLive service is the perceived present value of a console (around $300, using the current price of the Xbox 360 as a proxy). If the OnLive service is priced below $5 per month (our best guess as to the trade-off between buying a new console and subscribing to a service), it is likely to succeed. If it is priced much higher, it will likely face consumer resistance.